Another new dawn

When Japan’s new nationalist prime minister swept to power last month, he placed reconciliation with China at the top of his agenda.

At his first news conference after being elected to succeed Junichiro Koizumi, Shinzo Abe, Japan’s first prime minister born after World War II, said he would try to soothe relations with Asian neighbors, particularly China.

"A peacefully developing China is the most important country for Japan," he said, paving the way for a groundbreaking summit with his Chinese counterpart, President Hu Jintao.

It was the first meeting between the leaders of the two largest Asian economies since Koizumi visited Beijing in 2002. Hu refused further high level talks in retaliation to Koizumi’s repeated visits to the Yasukuni war shrine, which honors convicted war criminals among Japan’s war dead and is viewed by Beijing as a symbol of Japan’s unrepentant militarism.

But the summit would not have been possible without a concession from Beijing. In a sign China is eager to pave the way for improved relations, Beijing dropped the precondition that the Yasukuni visits be repudiated before a top-level summit but kept up pressure on Tokyo to pay heed to its concerns.

Continuing the thaw in relations, Abe chose Beijing for his first overseas trip as prime minister.

And when North Korea announced it planned to test a nuclear device to coincide with the summit, the two states seized the opportunity to divert attention away from traditional obstacles and issued a joint statement condemning the plan. Pyongyang went ahead with the test a few days later and the two nations were again united in their condemnation.
But cracks soon emerged. As China Economic Review went to press, Japan and China were united in their support of UN sanctions against North Korea, which ruled out the use of military force at China’s insistence, but differences had emerged over interpretation and implementation.

Yasukuni revisited

The visits to Yasukuni are also unlikely to be forgotten. Chinese Foreign Ministry spokesman Qin Gang made this clear upon Abe’s appointment, making veiled reference to the shrine.

"At present, there are obstacles to bilateral ties. The reasons are quite clear and the Japanese government is aware of them," he said.

The People’s Daily, mouthpiece of China’s Communist Party, declared in a commentary that Abe’s attitudes toward Asia were "ambivalent" and warned that his ambiguous stance regarding the shrine could block improved ties with Beijing.

Abe, who has defended Koizumi’s visits to Yasukuni and has paid his respects there in the past, has avoided making commitments about future visits beyond promising not to make a political show. For now his stance appears to be working, but should Abe decide to visit the shrine, the ball will again be in Beijing’s court.

But does it even matter?

According to an analyst with the Shanghai Stock Exchange, short of an all-out war, high-level diplomatic feuding does not affect mainland markets.

"Sometimes people are very emotional so they talk about the relationship but it is not important for the market’s direction."
Two-way trade also seems largely unaffected, with eight years of increases despite the lack of high-level summits and escalating tensions.

According to the Ministry of Commerce, bilateral trade hit US$131 billion between January and August of this year, up 11.8% from the same period of 2005. Yoji Okano, a researcher at the Japan External Trade Organization (JETRO) predicts trade will top US$200 billion this year, above the 2005 record of US$189 billion.

Business as usual

Although some Japanese businesses outside of commercially-minded Shanghai could suffer if relations take a turn for the worse, the diplomatic freeze of the past five years had little impact on the business of Hiroshi Kobayashi, a graphic designer at a Japanese company in Shanghai.

His view is backed by data from JETRO’s latest survey of Japanese enterprises on the mainland. The survey showed that the most pressing concerns are increases to the minimum wage rate, improved monitoring of tax payments, and the impending enactment of a new labor contracts law, all of which may put pressure on labor intensive Japanese companies in the south.

Even the wave of anti-Japan demonstration in April 2005 coincided with a record US$6.5 billion in Japanese investment.
"For many Japanese companies, political tensions may not really be an issue," Okano said.